Elon Musk got the green light from his shareholders to merge Tesla with the solar panels manufacturer SolarCity. Critics charge that the merger would prove an economic disaster for Tesla. Donald Trump’s pledge to pull the plug on subsidies for renewables could also put a dent in Musk’s plans. John Dyer reports from Boston.
American entrepreneur Elon Musk’s dream of a full-service solar energy company is one step closer to becoming reality after 85 per cent of Tesla shareholders approved the merger with SolarCity.
Musk is the CEO of Tesla, a growing electric car manufacturer, and the largest shareholder in SolarCity, the biggest maker of photovoltaic panels in the United States. Both are based in Silicon Valley in northern California.
Solar power for homes and cars
“Your faith will be rewarded,” Musk told shareholders at Tesla’s Fremont, California factory last week. “We look forward to showing the world what Tesla and SolarCity can achieve together.”
Proposed in June, the USD 2 billion deal is part of Musk’s dream of integrating Tesla’s innovative batteries to Solar City’s marketing platform so that customers would power their homes and automobiles using both companies’ technologies.
In a sign of his thinking, Musk last month unveiled new solar panels that look like regular roof shingles but capture the sun’s energy. The cheap panels are not yet available widely, but Musk believes they could be cheaper and longer lasting than traditional roofs.
“The basic proposition will be: Would you like a roof that looks better than a normal roof, lasts twice as long, costs less and, by the way, generates electricity?” he said. “That’s looking really promising. I think there’s even room for improvement beyond there.”
Critics are sceptical
But the deal faces significant headwinds.
A day before shareholders approved the deal, investment firm Kynikos Associates Founder and President Jim Chanos said he was bullish on solar energy for consumers but didn’t think solar panels were a good bet for investors. Putting solar panels on roofs wasn’t lucrative, he said.
SolarCity recently posted a quarterly loss of USD 225.3 million. Last year, its total losses were USD 769 million. In 2014, it lost USD 375 million. The company now holds USD 3 billion in debt.
“The combination is absurd. It’s ridiculous,” said Chanos. “There is deflation in the solar business and Tesla is taking on these debts.”
Other critics have suggested that Musk was bailing out SolarCity to help his cousins who run the solar panel company – Lyndon and Peter Rive.
Musk is confident
But Musk forecast that SolarCity would generate USD 1 billion in revenues next year, or around USD 300 million more than analysts predict for this year. Last year, the company generated only USD 400 million last year.
Tesla is also facing significant challenges. Although the automaker posted a surprise USD 22 million profit last quarter, that was an aberration in a string of losses totalling almost USD 1.2 billion in the last two years.
Again, Musk said he has a plan to change that trajectory. He hopes the new USD 35,000 Model 3 sedan will turn around his balance sheet when it hits the road next year. He’s now aiming to sell half a million cars in two years, up from 50,000 last year.
CFRA Research Analyst Efraim Levy said the combined company could reduce costs at the same time that solar energy is near a tipping point where cost, popularity and an improving American economy could pay big dividends.
“It’s kind of like the Tesla investment in general,” he said. “You’re paying a lot upfront. The risk and cost are more front-end loaded with the potential benefits coming down the road.”
Trump could put dent in plans
Musk faces a changing regulatory landscape, too.
President-elect Donald Trump and Republicans who control Congress have said they want to abandon international climate change agreements and gut the tax credits, subsidies and regulations that are currently helping the American public transition from carbon-based fuels to green energy.
Last week, however, Musk said Tesla and SolarCity would be fine if the U.S. government also phased out subsidies and tax breaks for oil and gas companies while undercutting solar’s perks. He was confident, he said, that he could play on a level playing field.
“The great irony is, if all the incentives went to zero, Tesla’s competitiveness would improve dramatically,” he said.